Take Benchmarking to a Higher Level
Use both internal and external standards to get a true read on practice performance.
BY MARK E. KROPIEWNICKI, J.D., LL.M.

As a business owner, it's essential to closely review your practice's finances, operations and performance. Regular evaluations of practice performance by objective standards -- benchmarking -- allows you to ascertain your practice's strengths and weaknesses, how your operations compare with other ophthalmology practices, and what data to monitor on a routine basis. It's easier to correct problems if you catch them early. In this article, I'll explain how benchmarking can raise "red flags" before problems become critical, and then lead you to productive solutions.

Benchmarking can serve multiple purposes. Primarily, it enables you to recognize changes in your practice based upon criteria you consider important. But it can also help plan and measure growth, rationally establish financial and nonfinancial goals, motivate ophthalmologists and staff, communicate critical processes to staff, and identify industry trends.

The great benefit of benchmarking is its ability to serve as an early warning system. Its weakness is not being able to clearly ascertain if a discrepancy from the benchmark is a real problem.

The root cause of a deviation from the norm may not be immediately apparent. Assume, for example, that the percentage of annual receipts an ophthalmology practice spends on staff salaries is five percentage points above the industry norm. There are at least five reasons that might cause such a deviation (excess staff, high pay rates, low reimbursement per unit of service, very low ophthalmologist production, or very high ophthalmologist production). Your ability to isolate the actual cause is critical in deciding whether or not corrective action is needed.

Benchmarking isn't a one-and-done matter. It's a continuous monitoring and progress-charting tool. But how often you decide to use it depends on your practice and your management style. Some practices conduct an annual evaluation in conjunction with budgeting and other goal-setting. Others check several indicators every month or quarter as part of an ongoing quality improvement program. Either way, you need to identify key practice benchmarks that you consider vital to your practice success.

You Need Good Data

To measure and benchmark your practice, you need practice data. You should be able to obtain that information from your office manager, billing staff and practice accountant. The data may not be readily available if it hasn't been coded or input in the way you need. Unavailability of information may slow down the benchmarking process a bit, but don't give up. Change your data-capture systems to record the information you want. The data must also be accurate; otherwise you'll have no confidence in the outcome of your analysis.

Practices today are much better at capturing relevant data with the help of ever more sophisticated and cost-effective computer software. In addition, more sophisticated benchmarking techniques and performance measures are being developed.

Types of Benchmarking

At least three distinct forms of benchmarking are commonly used in business. They are:

Internal. This is a kind of in-house check, comparing the practice to itself. Evaluate your practice's performance in key areas such as income, expenses, number of procedures performed, and volume of new patients relative to prior years. This data show if positive or negative trends are developing and, if you've implemented changes, whether your reforms are working.

With internal benchmarking, you can also compare where you currently are in relation to predetermined goals. An example is comparing actual profit (or loss) to budget. Unfortunately, many practices never perform even this very basic benchmarking.

External. Internal benchmarking is an important tool, but it can't provide a "reality check" against what other practices are doing. That's where external benchmarking helps. External, established norms can serve as guidelines to identify whether your practice data fall outside of normal boundaries.

Deviating from the norm doesn't necessarily mean that something is wrong. Your practice may be unusual, or even unique, and a deviation may indicate that you've found a better, or different, way to achieve a good result. Your practice may have a special mission that affects your numbers, or an unusual mix of services. Therefore, external benchmarking must be used with care. Your practice's context, objectives and values must be considered in interpreting a benchmarking result. Distinguishing real problems from "false positives" requires this type of deeper investigation.

"Best of Class." This approach to external benchmarking compares your practice with performance standards achieved by the most successful ophthalmology practices that are similar to yours. Best of Class benchmarking compares your practice with the results achieved by the 90th percentile of ophthalmology practices nationally.

Focus on These Areas

To measure your practice's success, you need the right data and the right standards for comparison. Surely some financial statement data -- profit and loss or balance sheet -- is critical, but what else should you look at? New patient flow? Ophthalmologist availability? Timeliness of payments from patients and payers? Patient encounters per ophthalmologist? These and other operational measures drive your practice. Decide what's important to your practice's health, and then decide how to measure that factor. The following elements are generally considered key to practice success.

Profitability

Beyond taking care of patients, there are few aspects of your practice that are more important than profitability. If you feel undercompensated for what you do, you're not going to be happy with your practice. Neither will your partners and associates. Without profitability, recruiting new ophthalmologists and administrative talent becomes difficult, and cash flow worries won't go away.

The key benchmark for profitability analysis is net income, meaning salary and other ophthalmologist benefits and expenses. Exactly what expenses and benefits are included in net income? Retirement contributions? Auto? CME expenses? Health Insurance? Dues? Beeper? Cell phone? Ultimately, the exact definition isn't critical, as long as you match your definition to that of the external benchmark you're using.

What if your net income per ophthalmologist is too low? The biggest determinant of profitability is gross income. It's far easier to increase your net income by growing revenue than by reducing overhead. Evaluate how well you collect payments by tracking your collection ratios. Look at your average number of days' charges in accounts receivable, and scrutinize aged accounts receivable in increments of 30 days. Look at your new patient visits.

If revenue is on target, check your expense items. The single biggest expense for most ophthalmology practices is for staff. Check the total dollars spent on staff, and the percentage of your revenue that staff expense absorbs.

Service Capacity

Service capacity is your practice's ability to accommodate and satisfy patients. Consider your ophthalmologists' availability in hours per week, your earliest available new patient and follow-up appointment slots, your support staff ratios for both clinical and administrative staff, and lanes available per ophthalmologist.

Do office space limitations impair your practice's ability to see patients? Also look at your ratio of optometrists, nurse practitioners and physician assistants to ophthalmologists. Adding a nonphysician provider may be a cost-effective way to increase your ophthalmologists' availability to patients.

Operational Effectiveness

While you may have service capacity, how well do you use it? Examine the ancillary services you provide. Offering ancillary services generally has a direct correlation with patient satisfaction -- and profitability. Look at new patient flow. Evaluate your coding methods. Undercoding will result in the loss of significant income, and overcoding may result in inquiries from various governmental authorities. Look at your payer mix. Consider the relative profitability of those payers.

Examine your staff-to-ophthalmologist ratio. Is it optimal for patient throughput, or are you cutting expenses to the detriment of revenue?

Production

Ophthalmologist production is key in most ophthalmology practices. Without enough work effort, your revenue will suffer, your backlog will build up, and your overhead will eat up your compensation. Check patient encounters per ophthalmologist and work RVUs per ophthalmologist to get a sense of what's happening.

Finding Benchmark Sources

Once you've isolated the characteristics you want to measure, you need external data to compare with your practice's performance. Where can you find such external data?

A number of potential sources of data exist. However, you need to examine them carefully to determine how credible they are. Questions you need to ask are:

Is the data specific to ophthalmology practices? Data isn't always available on an ophthalmology-specific basis.

How large is the sample size (i.e., how many ophthalmology practices reported data)? The larger the sample size, the more credible the benchmark.

What kind of ophthalmology practices provided the data? Look for a survey whose responding ophthalmology practices most closely resemble your own. Private, single-specialty ophthalmology practices are best served by data from private single-specialty ophthalmology practices as opposed to data from large multispecialty or academic ophthalmology practices. A perfect "fit" isn't always possible.

Depending on the particular characteristic, you may need to use data from ophthalmology practices that are different from your own simply because that's the only data that's available.

Some specific sources of data with which to do external benchmarking are:

• American Medical Group Association (AMGA)
• American Society of Ophthalmic Administrators (ASOA)
• The Health Care Group, Inc.
• Medical Group Management Association (MGMA)
• National Association of Healthcare Consultants/Society of Medical-Dental Management Consultants/Academy of Dental CPAs.

Using the Benchmarks

Once you've developed a set of benchmarks, cross-reference your practice's performance on each benchmark with the other benchmarks in your practice. Below-average performance on one benchmark may explain poor performance on another. For example, if you have a below-average number of billing personnel, it may explain why your accounts receivable over 90 days old are excessive. Your above-average wait for new patient appointments may explain why the number of new patient visits is below average. Your ophthalmologists' tendency to undercode may explain, in part, why revenue is below average.

If two benchmarks appear to correlate in this fashion, investigate further to determine what the analysis is really telling you. Don't stop at the obvious conclusion. For instance, as mentioned earlier, a higher-than-benchmark percentage of receipts spent on staff salaries might be caused by any of several different factors:

You may have too many staff. You should benchmark the number of staff full-time equivalents (FTEs) per FTE ophthalmologist.

Your pay rates for staff might be too high. You should check pay levels, using a good, locally based pay survey.

Your reimbursement per unit of service may be lower than average. You should benchmark your coding procedures and evaluate your patient/payer mix.

Your ophthalmologist production is very low. The result is that you're spending an unusually high percentage of your receipts on core staff functions. Benchmark patient encounters and RVUs per ophthalmologist, as well as coding distribution.

Your ophthalmologist production may be very high. It takes more staff and staff pay to accommodate the higher number of patients and resulting higher revenue. This may not be a bad thing, but check your data against other, similar practices.

Good benchmark results might not be as good as they seem. If your practice measures favorably against the benchmark for staff salaries, is that good? Too few, or low-paid, underqualified staff won't be able to deal with heavy patient volume or collect accounts receivable promptly. Thus, a low percentage of receipts spent on staff salaries could actually be bad because inadequate spending on staff is limiting patient volume and accounts receivable turnaround.

And a seemingly bad result -- high percentage of revenue spent on staff salaries -- may actually be good because high staff expenses are needed to produce high revenue.

It's Worth the Effort

Even with proper benchmarking methods, ophthalmology practice analysis isn't always simple. Medical practices are often viewed as "simple" businesses, but they aren't. And they're getting more complex all the time. You may need to rule out different explanations for a variance before you find the root cause.

Benchmarking doesn't solve problems. Benchmarking simply helps you detect existing or developing problems in your practice and identify possible solutions to those problems. It also lets you measure the success or failure of remedial actions you take. Make the effort to master the art of benchmarking and I think you'll agree that it's well worth the cost and time it takes.

Mark E. Kropiewnicki, J.D., LL.M., is a principal consultant with The Health Care Group, Inc. and a principal attorney with and president of Health Care Law Associates, P.C., both based in Plymouth Meeting, Pa. He can be reached at (610) 828-3888 or via e-mail at mkrop@healthcaregroup.com.